Sterling weakens ahead of UK budget and central bank decisions

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Sterling weakens ahead of UK budget

Highlights

The pound fell 0.31% to 83.98 pence against the euro and 0.15% to $1.3348 on Monday amid pre-budget caution.
Market consensus expects UK fiscal restraint, with fiscal headroom restored to around 15 billion pounds and lower long-dated gilt issuance supporting bond market stability.
Sterling remains supported by resilient UK economic data, a relatively hawkish Bank of England stance, and easing Brexit risk premium, though global rate decisions this week could add volatility.

Budget caution shapes sterling trading

As reported by Reuters, the pound falls 0.31% to 83.98 pence against the euro on Monday after touching 83.63 pence on Friday, its strongest level since the end of May 2025. It also eases 0.15% against the U.S. dollar to $1.3348.

British finance minister John Healey is expected to present a cautious first budget, with stability in the bond market taking priority over large spending measures that Andy Burnham discussed when he became prime minister. The pound has been supported in recent weeks by easing concerns over the UK's debt risk premium, reducing investor anxiety that Britain could come under pressure similar to France.

Fabio Bassanin, strategist at Morgan Stanley, says market consensus has shifted toward an outcome that is relatively supportive for government bond duration. He cites expectations of limited policy action, adherence to fiscal rules, fiscal headroom restored to around 15 billion pounds and lower issuance of long-dated gilts.

Policy week and regional market implications

Strategists say sterling's outlook is also supported by resilient economic data, which allows the Bank of England to maintain a relatively hawkish stance. They also point to wider French bond spreads, which support the pound against the euro, and signs of a thaw in UK-European Union relations that could gradually reduce sterling's remaining Brexit risk premium.

Investors are now watching a crowded calendar of central bank meetings later this week. Policy decisions are due from the Federal Reserve, European Central Bank, Bank of Japan, Reserve Bank of New Zealand and Bank of Canada, leaving sterling and broader currency markets sensitive to shifts in rate expectations.

In our earlier article on John Healey’s deficit-reduction plans ahead of the October 28 Budget, we explained that the chancellor signaled a tighter fiscal phase aimed at reinforcing investor confidence while still offering targeted cost-of-living and business support. We also noted the UK’s 0.1% GDP growth in August and the rising political pressure around taxes and structural reforms as the government tries to balance fiscal discipline with the growth narrative.

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